The Impact of Debts on American Investors

The impact of the national debt on each American citizen will never be completely understood unless we first understand how the dollar is affected by it. Trying to put this correlation as simply as possible: As the debt goes up, it drives down the dollar’s purchasing power. Inflation, despite political rhetoric to the contrary, has become a way of life in this country. Since nineteen-seventy, the consumer price index has risen four hundred ninety-one point five percent and, if the dollar were to lose its advantage as the world’s reserve currency, the inflation problem could escalate beyond limits tolerable to most Americans.

These facts which concern the dollar value – more than any politician’s speech, more than any documentary, more than any economic treatise – tells us the story of what has occurred to the United States. It tells why inflation is endemic in our society despite allegations that it is dead; why we can’t seem to get ahead despite our best-laid plans and arduous work; why we work five months in a year to pay our taxes; why the national savings rate is one of the worst in the Western world. As the dollar has deteriorated, the same has happened to the American lifestyle. To our misfortune, it seems that this set of circumstances will not be reversed in the immediate future. The government soaks up too much capital – too many tax dollars and too much of the available lending pool.

Government economists formerly told us that the national debt doesn’t matter because we owe it to ourselves. Although a specious argument, even that rationalization is no longer true. The United States is now the biggest debtor nation on the face of the earth. There is no country that runs even a close second. We don’t simply owe the national debt to ourselves anymore. In fiscal year two thousand-three foreign-held U.S. treasury debt had expanded two hundred sixty billion dollars over the previous year – an astounding surge of over twenty percent – & most of it went into foreign central banks.

Even though most people in the international investment community deem a default on the United States debt unimaginable, default still is one of only three forms of eliminating debts, the other two forms would be either paying it or inflating it away, it cannot be ruled out completely. Default does have serious consequences for the individual holding that debt as an asset on the balance sheet, it could be either outright or in the form of deposits in the money market.

We can use the following example to clarify the situation: Financial Times recently published an article on Argentina’s debt default and the impact on the average Argentinean pensioner, who bought government bonds based on their belief that it would be a solid risk. In late two thousand-one, Argentina defaulted on about one hundred billion dollars of its sovereign debt, including the ones held by its own citizens. The article explains the story of a sixty-eight year old Argentinean citizen who since that moment has not seen a single centavo of his money. He worked his whole life, he lent the the state money when the state needed it, and this poor man was punished for it. Having to rely on his family makes him feel worse than useless. Another retiree who lost his savings in the debacle commented that the Argentineans are set to suffer more than anyone else because, unlike foreign investors, Argentineans have a government that does not listen to them or that defends them. The government is locked in high-profile negotiations with its international creditors to restructure their debt, but as Financial Times clarifies, the best outcome for the private saver will likely be that the Argentineans would see their savings cut in half.

Even though default remains a potentiality for the United States national debt, the more probable scenario would be the other track, inflating the debt away. Dollar depreciation shows a much more plantable option to America’s overseas creditors: a slow dwindling away of the dollar as the world’s most important reserve currency and a long-term policy of dollar depreciation, over the chasm of default. And that alternative will inevitably lead to consequences of its own.